E.ON to Split into Two Entities

E.ON to Split into Two Entities; Will Focus on Renewables, Distributed Generation, and “Customer Solutions”

By Dean Frankel, Lux Research

E.ON, the German utility giant with 61 GW of generation assets, has announced plans to split its business in two. The portion that will focus on distribution networks and renewables will retain the name “E.ON,” while the currently unnamed company will include conventional generation, exploration and production, and energy trading businesses. This new E.ON will focus on three core divisions, namely renewables, distribution, and “customer solutions” spread across Germany, the United Kingdom, Turkey, and Sweden, among others. E.ON expects to complete this reorganization by the second half of 2016, and it has already begun to sell off conventional assets, as it has in selling its businesses in Spain and Portugal to Macquarie for $3 billion. Along the same lines, E.ON is also “evaluating the sale of our activities in Italy and will conduct a strategic review of our exploration and production business in the North Sea.”

According to E.ON’s statement, the power generation business model is changing due to the growth of renewables and distributed generation, which are shifting the role of customers and the needs of the distribution network. The company stated that its “all of the above strategy” to operate both traditional power generation and distributed customer solutions were increasingly at odds with one another. Distributed energy resources are a key component of this shift, but E.ON also highlighted the value of interconnectivity along the value chain from homes to smarter grid controls and distribution networks. While it is unclear how interconnectivity will translate into a concrete business, the company has already become a strategic investment partner for AutoGrid, a utility data analytics firm, as well as a smart home developer, Leeo. The shift away from the conventional generation business recognizes that E.ON has not been able to convey its “all of the above strategy” to the public markets. Its stock price has consistently declined over the past five years, like the majority of its peers in the conventional power generation arena.

E.ON’s decision to focus on customer solutions surrounding distribution networks is reflective of a broader shift occurring in the utility landscape. The company stated it will invest in centralized wind and solar assets, while making its distribution networks smarter to incorporate distributed generation. It is unclear what role E.ON will have in enabling distributed generation, whether as a service provider or operator, but the decision has key business model implications in the industry. The German utility RWE had already planned to shut down 6 percent of its power generation capacity when it announced that it will be divesting its conventional power generation business in favor of a “prosumer” focused model. Furthermore, Germany’s Energy Transition (its so-called Energiewende) is phasing out nuclear generating assets, while the growth of distributed, customer-owned solar generation is a major contributor to the country’s 25 percent renewable generation. Germany’s wholesale power market stipulates that renewables are preferred resources, and its large base of renewables can actually push power prices negative during certain times of excess generation.

Germany is the first major market to experience these shifts, but even in the U.S. – where utilities are far, far away from a distributed energy and resources-driven existential threat – forward thinking players are beginning to react to the changing power landscape. NRG announced a similar plan to E.ON’s earlier this year, and quickly followed the announcement with an acquisition of Goal Zero, a provider of personal power products. Unlike its utility peers, the financial community has consistently rewarded NRG for acknowledging utility disruption and hedging its bets in renewable and distributed assets. The decision by E.ON to decouple its power businesses will not be the last of such announcements in the shifting utility landscape. Although utility disruption from distributed energy resources may not be imminent globally, the industry’s decreasing costs, growth rate, and the changing dynamics of power generation are forcing action upon forward-thinking utilities.

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March 18, 2015